RBI governor Raghuram Rajan cuts repo rate by 25 bps to 6.5%

Mumbai: India’s central bank on Tuesday cut its key lending rate by 25 basis points in line with overall expectations, comforted by the central government’s fiscal prudence steps, a cut in interest rates on small savings rates and moderate inflation.

The repurchase rate, or the short-term lending rate for commercial banks on loans taken from the central bank, stands lowered to 6.5 percent from 6.75 percent, while the reverse repurchase rate, or the short-term borrowing rate, has been adjusted upward to 6 percent from 5.75 percent.

The changes were carried out in the monetary policy for the current fiscal announced by Reserve Bank of India (RBI) Governor Raghuram Rajan here on Tuesday.

Among the two key instruments to directly regulate the money flow in the system, the cash reserve ratio (CRR), which is the quantum of liquid funds against deposits which commercial banks have to hold, has been left unchanged at 4 percent.

But the minimum daily maintenance of CRR has been cut to 90 percent from 95 percent.

Similarly, the statutory liquidity ratio, or the value of specified securities which commercial banks have to subscribe to, stands at 21.25 percent, effective April 2 onward.

The central bank had last cut its short-term lending rate in September by 50 basis points to 6.75 percent. Cumulatively, 2015 saw the monetary authority cut the repo rate by 1.25 percent.

“Inflation has evolved along the projected trajectory and the target set for January 2016 was met with a marginal undershoot,” Rajan said in his policy statement, adding that retail inflation was expected to decelerate modestly and remain around 5 percent in this fiscal.

“After two consecutive years of deficient monsoon, a normal monsoon would work as a favourable supply shock, strengthening rural demand and augmenting the supply of farm products that also

influence inflation,” he said.

“On the other hand, the fading impact of lower input costs on value addition in manufacturing, persisting corporate sector stress and risk aversion in the banking system, and the weaker global growth and trade outlook could impart a downside to growth outcomes going forward,” he said.

He said the growth projection for 2016-17 was being retained at 7.6 percent.